This Malpractice Insurer Beats the Odds

Writing medical malpractice insurance isn't an easy way to earn a living. But ProAssurance (PRA) is doing a pretty good job.

At any unpredictable moment, a runaway jury can hit a medical provider -- and hence its insurer -- with a big award. Doctors and hospitals feel that the premiums charged by malpractice insurers are already plenty high, and they balk at premium increases. Profit margins are hard to maintain, and the incidence of claims is hard to predict.

Despite these obstacles, ProAssurance, a malpractice insurer based in Birmingham, Ala., has shown a profit in every year for the past decade. The year just concluded looks likely to be its second best, with earnings of $4.52 a share, $0.12 behind the record total of $4.65 a share in 2011.

ProAssurance is also a debt-free company, an attribute you don't see too often these days. Of the 500 companies in the Standard & Poor's 500 index, only 21 are debt-free. (ProAssurance isn't in the S&P 500.)

On top of that, ProAssurance's stock is inexpensive. It sells for only 10x the past four quarters' earnings and only 1.2 x book value (corporate net worth per share).

Of the six analysts who publish opinions on ProAssurance, five rate it a Buy. But as far as I've noticed, no one is pounding the table for it. The one analyst who rates it a Hold is J. Paul Newsome of Sandler O'Neill -- and he has rated it a Hold since at least June 2010. Back then, the stock was $30. Now it's at $46.

What's more, the analysts' price target hardly seems aggressive. The consensus is that the stock should hit $50 by a year from now. I believe a more reasonable one-year price target would be $54, which would be up about 17% from Thursday's closing level. That figure would be 13x analysts' consensus guess about 2013 earnings, which is $4.18 a share.

The dividend yield isn't bad, a little over 2%. In my opinion, there is ample room for the dividend to be raised in the future.